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STOLI and contestability provisions: is time on your side?

The outcomes of STOLI cases often turn on the jurisdiction in which the suit is brought, as state laws on insurable interest, misrepresentation, and myriad other factors vary widely. One recent illustration of this principle can be found in two seemingly contradictory decisions by different state courts concerning whether a challenge to insurable interest must be brought within the policy’s contestability period.

In Halberstam v. U.S. Life Insurance, a New York court recently required the challenge to be made before the contestability period expires. Due to the particular New York contestability statute, which prevents any contest after two years, and judicial precedent that a contract lacking insurable interest is voidable but not void ab initio, the court granted summary judgment against the insurer because its insurable interest claims were brought after the two-year contestability period.

The Superior Court of Connecticut found otherwise, denying a motion for summary judgment brought on the same basis. The court in PHL v. Charter Oak Trust opined that because a contract lacking insurable interest is void ab initio, the contestability clause would never have come into effect, and so would never operate as a bar to insurable interest claims.